EconPapers    
Economics at your fingertips  
 

Addressing water shortages by force of habit

Anke Leroux (), Vance L. Martin and Hao Zheng

Resource and Energy Economics, 2018, vol. 53, issue C, 42-61

Abstract: Water shortages worldwide are increasingly managed via supply diversification. Yet efforts to optimise diversification have thus far failed to account for important empirical evidence on habit-driven water demand. To resolve this disconnect, an intertemporal optimisation model is developed to generate a supply portfolio that weights alternative sources of water according to the uncertainty of inflows, supply costs and habit formation. The model demonstrates that failure to account for habit-driven consumption leads to sup-optimal water infrastructure investments with too much emphasis on risky, weather-dependent sources, while weather-independent sources with guaranteed supply are underemphasised. Importantly, the optimal share of safe sources depends critically on how sensitive habit formation is to supply shocks. This implies that the benefits of policies targeting water saving behaviours and investments during periods of low supply extend beyond water conservation to more cost-effective supply portfolios. Empirical results demonstrate the importance of accommodating habit-driven demand within optimal diversification strategies.

Keywords: stochastic habit formation; water consumption; portfolio optimisation; model calibration (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0928765517301094
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:resene:v:53:y:2018:i:c:p:42-61

Access Statistics for this article

Resource and Energy Economics is currently edited by J. F. Shogren and S. Smulders

More articles in Resource and Energy Economics from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

 
Page updated 2019-04-16
Handle: RePEc:eee:resene:v:53:y:2018:i:c:p:42-61